What Apple dumping Intel could mean

Commentary: Could roil through industry if others mimic Apple

SAN FRANCISCO (MarketWatch) — If Apple Inc. really dumps Intel Corp. as its provider of chips for the Macintosh family of computers, the move could be a harbinger of things to come for the PC industry and bad news for the semiconductor giant.

Earlier this week, Bloomberg reported that Apple
AAPL, +0.21%
is exploring ways to replace Intel’s
INTC, +0.10%
processors in the Macintosh, which Apple has been putting in the Mac since 2005. The report said that such a move, if it happens, would probably not occur until about 2017.

To make the switch Apple would develop its own custom designs based on ARM Holdings Inc.
ARMH, -2.12%
technology and have a contract manufacturer like Taiwan Semiconductor Manufacturing Co. make them.
2330, +1.01%Read Bloomberg report.

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Analysts said they were not surprised by the report, as there have been rumors about such a move in the last few months. Some were more skeptical than others that it might really come to pass, but one thing was clear. If Apple starts to design its own chips for the Mac, others could follow. Intel’s shares were hit by the news. Read The Tell blog post on Intel's shares rattled.

“We believe that Apple is a pioneer in this movement and would not be surprised if Apple, like Microsoft, moves to an ARM-based PC product,” said Gus Richard, an analyst at Piper Jaffray, in a note to clients Tuesday. “We do not believe this is a positive trend for Intel.”

Intel referred questions from a MarketWatch reporter to Apple. Neither Apple nor a spokeswoman for ARM would comment on the report.

Such a move by Apple would be a huge undertaking, since switching a core processor as the heart of hardware is not merely an instance of popping one semiconductor out for a replacement chip, or a supply chain switch for Apple. The company would also have to rewrite its Mac operating system to run with the ARM architecture, as it did when it moved from the PowerPC chip family to Intel.

Apple

Macbook Pro

Apple’s recent management shakeup and the discussion of more collaboration between hardware and software units, has also fueled some of this speculation.

Richard’s comment that the move wouldn’t be “positive” for Intel, while perhaps the understatement of the day, points to a trend occurring as smartphones and tablets become more popular.

Companies developing the software and the mobile devices — Amazon.com Inc.
AMZN, -0.27%
Google Inc.
GOOG, +0.40%
Microsoft
MSFT, -1.37%
and others — are now trying to control more and more of the consumer experience, and thus the development of all of their products. That was seen when Microsoft decided to design its Surface tablet itself, which also marked its first major break with Intel. The first iteration of the Surface, the Surface RT, uses a chip based on an ARM Holdings design. The next Surface, however, will be introduced with an Intel chip inside.

Kevin Krewell, a senior analyst with the Linley Group, said the potential shift by Apple has been rumored for some time. “The new generation of 64-bit ARM cores coming in 2014 ... are quite capable of PC workloads,” Krewell said in an email, adding that he was typing on the Surface tablet running the ARM-based Tegra 3 chip from Nivida Inc.
NVDA, -1.84%
“And it works just fine.”

As companies try to control every part of the whole “ecosystem” of the tablet and the smartphone — from the operating system, to the app store, to all of the hardware itself — they eventually may want to develop or control every aspect of the development. This is a different paradigm from the PC industry, where companies buy standard parts and basically assemble them, adding little innovation except in the chassis designs.

ARM designs allow for companies to have some input and customizing of the development. With Intel, companies are buying standard chips that the semiconductor giant has designed and manufactured. Apple’s iPhone and the iPad both use ARM-based processors.

“One of the consequences of the post-PC and system-on-a-chip eras is the shift back toward internally developed silicon away from merchant silicon,” Richard wrote.

Sergis Mushell, an analyst with Gartner Inc., does not believe that Apple would convert the entire Macintosh line to an ARM-based design. “I don’t see a world where they would discontinue a product line just to produce their own chip,” Mushell said. “They would do it where and when it makes sense.” He said the key question for those wondering if the rest of the PC industry could embrace ARM is: can ARM chips really deliver on everything, including total compatibility with legacy Windows software?

“Are we going to have an environment where 100% of the people are going to be able to do everything they want to do on ARM?” he asked, noting that ARM’s recent news about its server chip is for a “microserver” not a traditional server. “The horsepower you are given does not meet the horsepower that the x86 has,” he said, referring to Intel’s architecture.

For its part, Intel has been pushing hard to make inroads with less-power-consuming chips aimed at tablets and smartphones, but the bulk of its revenue is still from PCs and servers.

But if Apple does eventually start to develop more of its own chips, and other companies follow, Intel, the largest chip manufacturer in the world and one of the few to have its vast plants, might have to rethink its huge fixed manufacturing costs.

If the potential scenario with Apple were to pan out, Richard’s vision of Intel having to get into merchant manufacturing for customers is perhaps not that far-fetched.

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